Early Stock Talking readers may remember my $CHEF recommendation from a few months ago. At the time (April 12, when the stock was trading at $12 – it closed yesterday at $20), I wrote:
Overall, I’m confident CHEF will survive 2020 and return to somewhere close to its expected growth in 2021, 2 or 3 – if you assume this can happen, the company to me is a strong buy at its current $392 million valuation. In its last investor presentation, the company projects $115-$125 million of adjusted EBITDA in 2-3 years, and $300-$350 million of EBITDA in 5-10 years. These are long time horizons where anything could happen, but if the company gets anywhere close to these numbers, the stock is cheap right now.
When I wrote that, I was not forecasting that a vaccine could hit the market before year end 2020. I was simply trying to do a liquidity analysis over the next few years to see if CHEF could survive in a down environment
For most non-tech stocks I’ve analyzed since the dawn of COVID, the cornerstone of everything is how long the company can survive in hibernation mode. By hibernation mode, I mean low to no sales and a cash burn that assumes COVID doesn’t get any better. If a company can go a year in hibernation mode during COVID, I basically view it as a free call option on the business when WFH / lockdown orders lift. Of course, this assumes the expectations contained in the valuation are low (check out the CHEF post for some analysis on why I thought the market was declaring the company dead).
A little more on hibernation mode. The key metrics for evaluating hibernation mode are 1) Time to Survive, or Cash on Hand / Cash Burn and 2) debt maturities. Debt maturities matter – you have to make a call on the a company’s ability to refinance its debt (said another way, if your cash burn is 0, cash on hand is 500, but you have a 1K debt maturity in Dec. 2022, the debt maturity is the key thing you’re evaluating). Refinancing debt is a more qualitative call. Time to Survive I’ve noticed most companies are signaling in conference calls or is easy to back into through some vanilla analysis ((Cash + Revolver Capacity) / operating expenses + other cash burn items).
How did evaluating hibernation mode change yesterday? For anyone living under a rock, Pfizer announced a COVID vaccine yesterday with 90% effectiveness (higher than the “market’s” 60%ish base case) that should be on the market by end of year (IMO, better than the market’s 1Q/2Q 2021 estimate). What this means is that reality beat expectations on a vaccine in terms of effectiveness and time to market by a wide margin. Any lenders now should feel better about financing traditional in-person businesses – the prospect of “normal” cash flows are pulled closer to now by I think two quarters. I think every company’s ability to refinance debt just improved, so debt maturities in the hibernation mode equation are no longer as big a concern for me.
I want to present three movie-oriented businesses today that in my opinion have strong hibernation mode characteristics and are worth fractions of what they can be in non-COVID times. Although every single one surged yesterday, I still think the market is significantly below what reality could be relative to expectations. A quick overview below:
– Cinemark ($CNK) – Large North American movie theater company with 534 theaters and 6K screens – a lot of Texas and California theaters, some locations in Latin America.
– National CineMedia ($NCMI) – Largest cinema advertising network in country. Does *not* own movie theaters and therefore is very asset light. Customers include AMC, Regal and CNK (who also owns some of the equity). They sell online and mobile advertising too on behalf of theaters.
– IMAX ($IMAX) – Unique theater and camera / technology company (I’m sure all of you have seen films in IMAX) with 1.8K theaters in 80 countries – highest Asia exposure of the three names – I’ll explain why this is important in a bit
Before I get to hibernation mode analysis, I want to try to dispel the three most common arguments I hear when I’ve presented my movie bull thesis to other people:
1. Box office receipts have been declining over time.
Complete fiction – you can look at any number of data sets to see for yourself – the reality is that ticket prices getting more expensive have more than offset declines in attendance. Box office records keep happening. Check out CNK’s chart on their Q2 deck below:
2. Premium Video on Demand (PVOD) is going to dominate movies.
PVOD doesn’t pay the bills for studios; movies do. The unit economics are just better on movies – a family of five pays likely $100+ for a trip to the movies, but gets Mulan on Disney+ for $30. Worse yet, on streaming, you can’t show trailers or display advertising in person. Time will tell, but there’s a reason studios aren’t bending to Netflix right now and releasing titles meant for theatrical release onto streaming. Check out this article on how MGM couldn’t come to streaming terms for the most recent Bond film. A constant in reading earnings call in this industry has been that studios are trying to figure out how to succeed WITH movie theaters (dynamic windows, delayed releases, etc.) and not without them. I’m willing to revisit this thesis if we see a rush of big titles into Disney Plus, Netflix, On Demand and others, but there’s no material evidence this is happening right now.
3. COVID killed the movies
I recommend everyone take a hard look at China and Japan. China is back to 2019 box office levels and Japan just did its largest box office weekend every for the movie Demon Slayer. Cinemark has 2/3+ of its theaters open now (plans for 90%+ by year end) and consumers are happy with their experience, reporting 96% satisfaction per their last earnings call. North America is hurting now but we haven’t seen a big theatrical release other than Tenet since COVID started. This argument is pure conjecture and already disproved by consumer behavior in China and Japan. Finally, per CNK management, not a single COVID case has been linked to movie theaters. Arguably, this is a far safer activity than gyms, restaurants or other back to normal industries.
Let’s do some brief hibernation mode analysis.
Time to Survive
– CNK – ~1 year. $826mm of cash, conservative $75mm burn / month (11 months left) assuming NO further re-opening (Q3 was 50mm, debt maturities increase in quarters ahead). They also have $100mm+ in tax refunds coming from the CARES act which should help. Per management, re-opening theaters is helping them lower cash burn.
– NCMI – ~1.25 years(management says 15 months). $137mm of cash, 7 of receivables, $11 burn / month. They can move the burn rate down to $9 per management and could also cut the dividend. Also have a revolver available (which they paid down last quarter to avoid paying interest). Get to breakeven cash at 45% of 2019 revenue via Q3 earnings transcript.
– IMAX – the best of the group . $305mm in cash, $10mm burn per month in ZERO REVENUE ENVIRONMENT (2.5 year runway in most draconian scenario). They are forecasting cash flow breakeven – meaning zero burn – for fourth quarter and first quarter 2021.
Summary – all three can survive a year in a world where COVID stays where it is now.
– CNK – Have $400mm of debt maturing in 2022 (could pay off with cash balance) and $755 in 2023 – will probably need to refinance next year.
– NMCI – Nothing until 2023, which is the revolver. Next maturity is 2025:
– IMAX – $300mm of total debt (more cash than debt right now). This is all a bank revolver. I think there is close to zero BK risk, and IMAX is easily the best capitalized of the three.
The refinancing story I’m comfortable with on all three, IMAX and NCMI especially. CNK in my opinion should have no issues refinancing. Prospective debt investors can take comfort in the vaccine news, the success of Japan and China’s movie industries and the high return CNK bonds would offer in a zero rate environment. Remember that the cruise lines, Dave & Busters and a number of other weaker names have refinanced in this environment.
You can see my earnings analysis via Twitter threads on CNK here and IMAX here.
The short of this thesis is that even after yesterday’s surge, movie names are still priced as secular decline industries that will never return to pre-COVID levels. I didn’t do any valuation analysis here, but the discount each is trading at relative to March levels is worth a look, as well as what each trades at relative to 0.5-0.75 of 2019 free cash flow. The three names I listed have enough liquidity to weather the storm and at big haircuts to 2019 cash flow should trade well above their current levels. I have my money where my mouth is here – I sold my CNK bonds to movie into a higher risk trade – equity in CNK, IMAX and NMCI.